What Are the Models for Turnover Leases?

A commercial lease is when a business owner has sole occupation of a commercial property or part of it to run their business. In return, they pay rent to the landlord. Typically, a standard lease will state an agreed rental amount and when the tenant must make regular payments. However, if you have a turnover lease, the rent structure differs from a standard commercial lease. This article will explain the typical models for turnover leases. 

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What is a Turnover Lease?

A turnover lease is a commercial lease with a different rent structure than the average commercial lease. It is more common among retail and restaurant businesses. The rental amount in a turnover lease is either wholly or partly based on the turnover of the tenant’s business. It is also known as turnover-based rent,

Under this model, parties would calculate rent as a percentage of the tenant’s turnover. However, the business’ profit does not determine the rent, so you do not need to deduct for overheads. The turnover percentage tends to be from 1% to 15% of the business turnover. The average is around 7%. Therefore, where you have a turnover lease, it will usually affect the relationship between the landlord and the business owner. The landlord will likely be involved in the commercial lease, as it is in their interest for the tenant’s business to progress well. 

Whilst turnover leases differ, there are two standard main models. We explore these below. 

1. Turnover-Only Model

One typical model for a turnover lease is where only the tenant’s business turnover will determine the rent. There is, therefore, just one single rent for the commercial premises. Below are two typical models this may take. 

Model One  

In this model, the commercial tenant must always pay a minimum amount of rent, which is a commitment to a minimum turnover level. Accordingly, where their turnover falls below this level, they will still have to pay rent at the agreed amount.

Where a commercial lease details this type of turnover lease model, the lease agreement will usually also contain a maximum turnover. This figure represents the maximum amount of rent the tenant will pay. Therefore, where their business does exceptionally well and even exceeds the maximum turnover level, their rent amount will not rise.

Model Two

The typical alternative turnover-only model for a turnover lease is where the commercial tenant and landlord agree on an annual base rent. You may hear people refer to this as ‘annual uplifts.’ In this scenario, the rent amount rises yearly depending on the tenant’s turnover. Therefore, you would calculate this amount by the turnover increase in the previous accounting period.  

2. Base and Turnover Model

There is also a hybrid commercial rent model turnover lease. This is where the rent in the turnover lease contains two parts as follows:

• baseline amount of rent set at an agreed level; and
• an additional turnover or margin-based part to the rent.

In this model turnover lease, the baseline rent is usually around 75-85% of typical market rent. As a result, where the tenant’s business turnover is below the agreed turnover percentage, the landlord still receives a reasonable rent.

Considerations Under Turnover Leases

The turnover of the tenant’s business determines the rent amount of a turnover lease. The commercial landlord must, therefore, be confident that the turnover is accurate for the rental amount. They will need the correct amount to ensure the rent is right. Typically, a commercial landlord will ask an accountant to certify the rent through a Report of Factual Findings. This report allows the landlord to examine what affects their tenants’ business progress, which may form part of their considerations when the lease renewal is due. 

Landlords may choose a margin-based approach towards the rent in a turnover lease. This model means the rent comes from the tenants’ business profit margins. These can differ between businesses with a similar turnover, so it may be an approach a landlord considers advantageous for a turnover lease.

Key Takeaways

A turnover lease is a commercial lease where the tenant’s business turnover determines the rent amount. There are two main models for a turnover lease: a turnover-only model and a base and turnover model lease. The former means that the tenant’s business turnover determines all the rent.

There are two variations for this model. One is where the landlord and tenant agree on an annual base rental amount, which raises annually in line with turnover. The other is where they agree on a minimum and maximum turnover to determine the rent amount. The alternative primary model for a turnover lease is where part of the rent is a base rent discounted from the market value, and the other part is set depending on turnover. 

If you need help understanding models for turnover leases, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.